Liquidity versus Profitability in DMB'S in Nigeria

Akademische Arbeit , 55 Seiten

BWL - Investition und Finanzierung

The main aim of this study is to find empirical evidence of the impact of effective liquidity management and its implication on the financial performance of deposit money banks in Nigeria for the period duration of the year 2005-2021. Five banks were selected in our sample and descriptive as well as correlation analysis statistics were used to conduct the study. Data sourced from the annual reports of the banks were analyzed.

Liquidity and profitability are among the two most important concepts in the corporate world. Whilst liquidity has been identified as one of the most crucial goals of working capital management, it is also a central pillar of cash management. When viewed with regard to a financial institution, liquidity is seen as a bank’s capacity to fund any increase in assets and simultaneously meet both expected and unexpected cash and collateral obligations at a reasonable cost and without incurring unacceptable losses. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical to the ongoing viability of the banking institution. The issue of effective liquidity management is a key factor in determining the survival, growth, sustainability, and performance of a bank in the banking industry. Since there is a close association between liquidity and solvency of banks, sound liquidity management reduces the probability of banks becoming insolvent, thus reducing the possibilities of bankruptcies and bank runs. The problem becomes acerbated when the deposit money banks try optimizes their profits at the expense of liquidity. This clearly causes some technical and financial hardships in the banks working capital management and performance.

Ultimately, prudent liquidity management must be championed as part of the overall risk management strategy of the banking institutions to ensure a healthy and stable banking sector. Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. Given that, any mistakes in liquidity planning and implementation can affect banking operations and might exhibit long term ripple effects on the economy.

Table of Contents

CHAPTER ONE: INTRODUCTION
1.0 Background of the Study
1.1 Statement of the Problem
1.2 Research Questions
1.3 Objective of study
1.4 Hypothesis of the Study
1.4.1 Hypotheses Development
1.5 Significance of the Study

2.0 Section 2 – LITERATURE REVIEW
2.1 Introduction: Concept of Bank Liquidity
2.2 CONCEPTUAL REVIEW: CONCEPT OF LIQUIDITY Question: How Do Banks Achieve Liquidity?
2.3 THEORETICAL REVIEW
2.3.1 THEORIES OF LIQUIDITY
2.4 EMPIRICAL REVIEW
2.5 Liquidity Management and Bank Performance
2.5.1 Financial Performance

3.0 Section Three: METHODOLOGY AND DATA ANALYSIS
3.1 METHODOLOGY
3.1.1 DATA ANALYSIS AND MODEL SPECIFICATION
3.2 Research Gap

3.0 SECTION FOUR: PRESENTATION OF DATA AND ANALYSIS
4.1 RESULTS AND FINDINGS
4.2 CONCLUSION

REFERENCES

ABSTRACT

Liquidity and profitability are among the two most important concepts in the corporate world. Whilst liquidity has been identified as one of the most crucial goals of working capital management, it is also a central pillar of cash management (Lamberg & Vålming, 2009). When viewed with regard to a financial institution, liquidity is seen as a bank’s capacity to fund any increase in assets and simultaneously meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical to the ongoing viability of the banking institution. The issue of effective liquidity management is a key factor in determining the survival, growth, sustainability and performance of a bank in the banking industry. Since there is a close association between liquidity and solvency of banks, sound liquidity management reduces the probability of banks becoming insolvent, thus reducing the possibilities of bankruptcies and bank runs. The problem becomes acerbated when the deposit money banks try to optimise their profits at the expense of liquidity. This clearly causes some technical and financial hardships in the banks working capital management and performance.

Ultimately, prudent liquidity management must be championed as part of the overall risk management strategy of the banking institutions so as to ensure a healthy and stable banking sector. Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. Given that any mistakes in liquidity planning and implementation can affect banking operations and might exhibit long term ripple effects on the economy.

Consequently, the main aim of this study is to find empirical evidence of the impact of effective liquidity management and its implication on the financial performance of deposit money banks in Nigeria for the period duration of year 2005-2021. Five banks were selected in our sample and descriptive as well as correlation analysis statistics were used to conduct the study. Data sourced from the annual reports of the banks were analysed.

The study therefore recommends that: Each DMBs should employ reasonable measures in the managing its liquidity via operating with a fluid portfolio concept such as lending and discounting bills instead of keeping excessive liquidity to meet customers’ demands for occasional large and unexpected withdrawals; in addition, the researcher advises DMBs to invest excess liquidity in available investments opportunities at various degrees of maturities in order to increase profitability and obtain optimal benefits derived from the time value of money.

In closing, the study concludes that illiquidity and excess liquidity pose problems to bank management operations and recommends that bank should adopt optimum liquidity models for better efficiency and effectiveness so as to optimize returns to shareholders equity and also optimize the use of the assets; given that both illiquidity and excess liquidity are "financial diseases" that can easily erode the profit base of a bank as they affect bank's attempt to attain high profitability and performance levels.

CHAPTER ONE: INTRODUCTION

1.0 Background of the Study

Liquidity has been identified as one of the most crucial goals of working capital management, it is also a central pillar of cash management (Lamberg & Vålming, 2009). Akenga (2017), Alshatti (2015), and Ehiedu (2014) believe liquidity to be the capability of an establishment to pay its immediate financial commitments when it is matured for settlement by converting short-term assets into cash without incurring any loss. That is why Ibe (2013) succinctly defines bank liquidity as the ability of banks to constantly meet cash, cheque, withdrawal commitments and loan demands of the its customers while meeting their basic requirement for bank reserves. Wherein the scope of liquidity is based on the timing required in converting assets of banks into monetary asset or cash; the certainty with regards to the conversion and the value realized from the asset and the banks’ ability to meet obligations without incurring losses. As it visibly shows the bank’s ability to immediately satisfy/meet its cash, cheques, other withdrawals obligations and legitimate new loan demand while abiding by existing reserve requirements. Khan and Ali (2016).

Moreover, as Okaro and Nwacoby (2016) assert that having adequate liquidity enables a bank to meet time, funding and lending risks. Consequently, a bank is considered liquid when it is capable of meeting its own obligation when due, repay deposit and to make such payment on customer order (Lartey and al (2013), BIS (2009)); as this creates a good image for itself in the face of customers and creditors. Also, retaining an excessive amount of or too little liquid assets is also costly to the firm and as it hurts financial performance (Nyamao, Ojera, Lumumba, Odondo & Otieno, 2012). Concomitantly, Bhunia et al. (2011), Orshi (2016), Apuoyo (2010), Akenga (2017), Alshatti (2015), and Ehiedu (2014), individually opine that assets are considered liquid and of high quality when they can be simply and directly be changed into cash at little or no loss of value; this also can be inferred to apply to banks as well given their core function with respect to financial intermediation which are deposit mobilization and credit extension (Sumaila, 2015). Given that liquidity creation is the primary function of banks, it also serves as a major source of vulnerability. This vulnerability stems from their primary functions as it requires deliberate policies and actions by the bank to mitigate against these inherent risks. Hence, banks usually have liquidity challenges when major portions of short-term liabilities are invested in illiquid assets. This situation worsens when such short-term liabilities are claimed at short notice. In the same way, markets are considered liquid when individuals operating in those markets can defray their assets at prices that would result in a gain. The undertaking(s) of firms is embedded with several obligations among some are the meeting of daily operational costs, unforeseen emergencies, contingencies, or accidents. In order for such obligations to be met efficiently and effectively, the firms are required to be liquid enough (Akenga, 2017).

In light of this, a major challenge appears to financial managers the world over; on how to maintain sufficient funds to meet their obligations as and when they mature while at the same time ensuring adequate returns on their investments. This rises from the apparent conflict that exists between the banks management objective of simultaneously maintaining a high level of liquidity and profitability; hence, the management of liquidity is inevitable. As the banks management needs to know the expected levels of liquidity to be in the system over a period of time; via planning and control of cash and other liquid assets, which must be also supported by daily liquidity checks by the Central Bank so that appropriate measures are taken to prevent any undesirable market developments that may negatively impact on the objective of price stability. Agbada & Osuji (2013)

Generally, profitability occurs when revenues exceed expenses and which allow bank to generate profits (Bawacha (2018)). Profit is a necessity and a major goal for commercial banks. Generally, finance managers mostly direct their efforts to this goal to enhance shareholders’ worth. To do this, banks need to remain profitable (Ignore and Kusa, 2013). Therefore, profits are not only a result, but also a necessity for a successful banking enterprise against other competitive banking institutions and the cheapest source of funds. Bank profits provide an important source of equity especially if re-invested into the business. This should lead to safe banks, and as such high profits could promote financial stability (Olweny and Shipho, 2011). Furthermore, since profitability is a reflection of how banks operate under a given environment as it mirrors the quality of a bank’s management and the shareholder’s behaviour as well as the banks’ risk management capabilities (Aburime, 2007). Having profits affect the bank’s cost of raising capital directly via its contributions to equity financing which is an indicator of the financial strength of the bank. More so, even if solvency is high, poor profitability weakens the bank’s capacity to absorb negative shocks, which eventually affect also solvency. Consequently, healthy and sustainable profitability is most vital in maintaining stability of the banking system and adds to the state of the financial system (Samuel, 2015).

Moreover, the profitability of firms in general may be improved by holding liquid assets; however, it gets to a point at which the holding of more of such liquid assets adversely affects a firm’s profitability. Thus, firms can achieve the “twin conflicting” objective of sound liquidity and improved financial performance by coming out with a more diversified and a balanced asset–liability mix, whereby they will be able to meet their financial obligations and still remain liquid and profitable (Akenga,2017; Alshatti, 2015; Apuoyo, 2010; Ehiedu, 2014; Njoroge, 2015; Omesa 2015; Orshi, 2016). Equally, as Charumathi (2008), asserts that since banks are always in a quest to maximize profitability while at the same time trying to ensure sufficient liquidity as regulatory stipulated. In order to achieve these clearly contradictory objectives, it is essential that banks have to monitor, maintain and manage their assets and liabilities portfolios in a systematic manner taking into account the various risks involved in these areas like the interest rate risk, foreign exchange risk, operation risk and gap analysis etc. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched Liquidity management as we know it is among the four cardinal decision areas of financial management that needs careful handling and planning for a business enterprise to be successful and profitable (Lyndon & Bingilar, 2016). Although, studies have it that a lack of adequate liquidity in a bank is often characterized by the inability to meet daily financial obligations. According to Pradhan and Shrestha (2016), the liquidity risk of banks arises from funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk. Thus liquidity management is made necessary to avoid possibility of entire system thus receiving great attention from policymakers, researchers and banking practitioners, taking into consideration that a liquidity shortage at a single so called “too big to fail” financial institution can lead to systemic contagion and instability.

It is worthy of note, also that a study of liquidity is of major concern to both the internal and the external analysts because of its close relationship with day-to-day operations of a business (Bhunia, 2012). Moreover, the use of Profitability and liquidity as performance indicators is crucially important to all major stakeholders of the enterprise. As shareholders are interested in the profitability of banks because it determines their returns on investment. Whilst Depositors are concerned with the liquidity position of their banks because it determines the ability to respond to their withdrawal needs, which are normally on demand or on a short notice as the case may be. Likewise, the tax authorities are interested in the profitability of the banks in order to determine the appropriate tax obligation and size (Olagunji et al., 2011).

Apparently, since deposit money banks are business concerns too who need to maximize profits. As their profits stem from the interest on their assets, such as loans and investment even from cash. However, most of their liabilities are deposits payable practically on demand. For that reason, managing healthy liquidity levels while at the same time maximizing profit becomes a major central issue in banking. It is in this vein, Akinwumi, Essien and Adegboyega (2017) are both in agreement to conclude that Liquidity and profitability can be likened to two centrifugal forces with contradictory objectives operating at opposite continuums which at all times threaten to pull the bank apart. Thereby placing the bank at a risky position. As such, a trade-off should thus be established between inadequate liquidity and excess liquidity as each of these has a profound effect on the banks performance in terms of profitability (Padache, 2006). This dilemma is not peculiar only to deposit money banks in Nigeria as sited by Eljelly (2004). It is thus crucial to determine the relationship between liquidity and profitability (Sile and al (2019), Ibrahim (2017), Ferrouhi (2014), Shachera (2012), Awlo and al (2019), Mazrova (2015). Therefore, Bassey and Moses (2015) conclude that the contradictory nature of liquidity and profitability can be explained by the intuitive reasoning that a bank operating with high liquidity (and in the process tying down investable funds) may have a low insolvency risk, but with a trade-off of low profitability.

In this vein, a consensus of opinions is created for liquidity management making it a fundamental component in the safe and sound management of all financial institutions. Given that Sound liquidity management involves prudentially managing assets and liabilities, minding both the cash flow and its concentration in order to ensure that cash inflows have an appropriate relationship to cash outflows. This needs to be supported by a process of liquidity planning which assesses potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions. Consequently, it behoves on a financial institution seeking to thrive under the existing competitive environment to ensure an astute management of its profitability and liquidity levels as both variables can make or mar its future. Thus creating a dilemma for liquidity managers to achieve a desired trade-off between liquidity and profitability (Nahum et all, 2007).

Generally, poor liquidity management affect earnings and capital. In extreme cases, it leads to insolvency and bank failure (Mugume, 2010). Distressed banks can only access funds from the market at high interest rate (Mpuga, 2002). This eventually causes a decline in the banks' earnings. However, a bank may ration credit if it feels that the liquidity management need of the bank is quite poor. Therefore, poor liquidity management reduces the capacity of the bank to effectively compete (Mathuva, 2010). When Distressed, banks can only access funds from the market at high interest rate (Alemayehu & Ndung‟u, 2012). This eventually causes a decline in the banks' earnings. Moreover, a bank's further borrowing to meet depositors' demand may place the bank's capital at stake (Alemayehu & Ndung‟u, 2012). Hence, managing liquidity is among the most important activities conducted by banks. Its great importance transcends the individual bank for sound liquidity management can reduce the probability of igniting a contagion thereby causing serious problems because a liquidity shortfall at a single institution can have system-wide repercussions (BCBS, 2008).

In Nigeria, the consequence of inefficient liquidity management in banks was brought to the fore in Nigeria during the liquidation and distress era of the late 1980s and early 1990s. The ripple effects of that eras liquidity crises made the number of commercial and merchant banks in the country fall from about 120 in 1991 to 89 in 2004. Bassey (2012) reported that out of the 89 banks that survived in 2004, 69 of them were declared marginal or fringe players while eleven (11) were in distress conditions. The Central Bank of Nigeria(CBN) in the exercise of its mandate to ensure a sound financial structure for Nigeria, implemented a number of financial sector reforms as the Nigerian banking system was later overwhelmed with shock frictions due to bad liquidity management, which led the bank to engage in a recapitalization process that made banks to increased its authorised share capital from 2 billion to 25 billion naira via any amalgamation solution to obtain the necessary capitalization and have a reasonable liquidity in 2005 (Markjackson et al., 2017). In addition, the Central Bank of Nigeria (CBN) was forced to inject over N620 billion into the banking system to improve the banks' liquidity and keep them from failing as a result of the global financial melt-down between 2008 and 2009 (CBN, 2013). Such that Nigerian banks wrote off loans equivalent to 66% of their total capital during the crises.

Lending their voice to the debate, Agbada and Osuji (2013), asserted that as the liquidity crises abated, the uncertainty created in its aftermath led funding sources to evaporate as many banks quickly found themselves short on cash to cover their obligations as they fell due. In extreme cases, banks in some countries failed or were forced into mergers. As a result, in the interest of broader financial stability, substantial amounts of liquidity were provided by authorities in many countries. Thus introducing in our modern age - a new Era of Government Bailouts. Moreover, Graham and Bordeleau (2010) added that during the early “liquidity phase” of the financial crisis that began in 2007, many banks despite having adequate capital levels still experienced difficulties because they did not manage their liquidity in a prudent manner. The crisis drove home the importance of liquidity to the proper functioning of financial markets and the banking sector. It is in this vein that researchers have established increasing interest in liquidity of companies globally and banks in particular, with emphasis on liquidity management and its impact on profitability (Khan and Ali, 2016; Ibe 2013; Abdullah and Jahan, 2014). This is because a strong and resilient banking industry is critical for economic growth and development in every economy.

Olatunde (2015) concluded that improvement and maintenance of proper liquidity coverage ratio by the financial regulators and the banks’ management in Nigeria can give rise to a growth in business performance. While the regulators are to ensure compliance, the management also complies by maintaining the minimum required liquidity and uses its available resources to profit the bank. Conversely, a bank operating at a low liquidity level (and thus freeing investible funds) may face high insolvency risk, but with a trade-off of higher profitability. As such, the liquidity ratio of a bank is considered as one of the most important indicators for commercial banks performance, given that once there is a lack of liquidity, this may lead to the loss of depositors’ confidence and drive them directly to withdraw their deposits hence, the importance of liquidity management (Bouzida, 2015). Because a bank's liquidity is high it leads to the problem of low investment in more profitable areas, and if it is low a fundamental problem for commercial banks is made as they are unable to meet cash withdrawals by depositors. As such, banks must optimise to allow them to survive and harmonize profitability and liquidity to ensure their continuity, avoid bankruptcy and achieve the highest possible return, as liquidity plays a significant role in making investment decisions because most investment decisions are related to the available liquidity ratio (Wahdan, 2017).

1.1 Statement of the Problem

Granted an inverse relationship amongst liquidity and profitability seems to exist theoretically.

As several studies have asserted that the liquidity status of banks plays an important role in a commercial bank performance. However, in some cases other studies point to the contrary. It is on the backdrop of the limited focal studies on this subject matter and the inconclusive results of the comprehensive studies that measure the impact of liquidity (among other variables) on bank profitability, and the stable liquidity among banks in Nigeria, thus prompting a more focused study that measures liquidity (in isolation) and using more recent data to conduct and provide more concrete evidence.

1.2 Research Questions

The following research questions were raised following the objectives.

1. What effect (positive or negative) does bank liquidity management have on bank profitability performance?
2. What is the nature of the relationship between the levels of lending by bank affecting bank profitability performance?
3. To what extent has the volume of bank cash and near cash equivalents influenced bank performance?
4. What are the challenges/constraints to the efficient resolution of the profit and liquidity dilemma of banks and how can they be resolved?

1.3 Objective of study

This study seeks among other things to investigate irrespective of the challenges faced by deposit money banks in Nigeria to determine the effect of liquidity management on bank profitability and performance.

Specifically, the study aims to measure the impact of:

1. Cash and cash equivalents to total assets ratio (CR) on ROA, ROE and NIM.
2. Cash to deposit ratio (CRR) on ROA, ROE and NIM.
3. Loan to deposits ratio (LDR) on ROA, ROE and NIM.
4. Loans to total assets ratio (LOTA) on ROA, ROE and NIM.
5. Liquid assets to total assets ratio (LITA) or (LATA) on ROA, ROE and NIM.
6. Liquid assets to deposits ratio (LADR) on ROA, ROE and NIM.
7. Deposit to Asset Ratio (DAR) on ROA, ROE and NIM.
8. Liquidity ratio (LQR) on ROA, ROE and NIM.

1.4 Hypothesis of the Study

The Research Hypothesis is hereby stated to give more emphasis to the objective of the Study.

H0: There is no significant relationship between effective liquidity management and performance of deposit money banks in Nigeria. (Null Hypothesis)

H1: There is significant relationship between effective liquidity management and performance of deposit money banks in Nigeria. (Alternate Hypothesis).

1.4.1 Hypotheses Development

In developing the hypotheses of the study, four independent variables were used to capture our crux on liquidity management. They are: liquidity (cash and treasury bill/total deposit), current ratio which is the current assets/ current liabilities, deposit to asset ratio and loan to deposit ratio; whilst the rest in our model are dummy variables. The following hypothesis is tested:

Ho1: Current ratio has no significant relationship with profitability.

Ho2: Deposit to asset ratio has no significant relationship with profitability.

Ho3: Liquidity ratio has no significant relationship with profitability.

For purposes of specificity, an outlay of our dummy variables are shown below

Ho4: Loan to Total Assets LOTA ratio has no significant relationship with profitability.

Ho5: Liquid Asset to Total Assets ratio LATA has no significant relationship with profitability.

Ho6: Liquid Asset to Deposits ratio LADR has no significant relationship with profitability.

Ho7: Deposit to Asset ratio DAR has no significant relationship with profitability.

Ho8: Loan Deposit ratio LDR has no significant relationship with profitability.

1.5 Significance of the Study

The Significance of the study’s findings cannot be underrated; as the literature has alluded to the fact that the survival of commercial banks depends largely on the level of liquidity and its deterioration will lead to the erosion of the level of public confidence in the banks. Moreover, virtually every kind of financial transaction/commitment has implications for a bank’s liquidity. As the study will be helpful to academia to teach future students of finance in the area of liquidity management practices and its impact on profitability. Thus the findings of our study will provide assistance in order to make critical decisions, formulating strategies mainly about sound liquidity management by providing insights for policy makers and top level managers of banks and all companies in general on the ills of liquidity mismanagement. This research will provide better knowledge on the disadvantages and stresses of over liquidity and under liquidity

2.0 Section 2 – LITERATURE REVIEW

2.1 Introduction: Concept of Bank Liquidity

The issue of liquidity although important to other businesses, is most paramount to banking institutions and thus explains why banks showcase cash and other liquid securities in their balance sheet statement annually. Unlike other conventional firms, bank assets are arranged in terms of the most liquid asset beginning with cash. It is in this light, Koranteng (2015) asserts banks’ liquidity is dependent on its liquid assets, the bank’s ability to acquire cash through deposits and finally, its ability to reinvest as and when needed. As the viability and efficiency of a bank is greatly influenced by the availability of liquidity in sufficient amount at all times. Banks must meet their due obligations and execute payments on the exact day they are due, otherwise, the banks stand the risk of being declared illiquid (Crocket, 2008). As Marozva (2015) in his research clearly points out, that there are several studies conducted and many still on-going in the debate to investigate the relationship between bank liquidity and bank profitability as findings so far has resulted in varying conclusions; whereas some researchers conclude that there is a negative relationship between these variables, other writers conclude otherwise; while some other researchers found either a weak or no relationship at all. Alas, the discussion still continues.

2.2 CONCEPTUAL REVIEW: CONCEPT OF LIQUIDITY

Liquidity is of paramount importance being a core issue of banking (Caruana and Kodres, 2008). Therefore, viability and efficiency of a bank is greatly influenced by the availability of liquidity in sufficient amount at all times. Banks must meet their due obligations and execute payments on the exact day they are due, otherwise, the banks stand the risk of being declared illiquid (Crocket, 2008). To this end, the most liquid financial assets are currency and transferable deposits as they are exchangeable immediately at their full nominal value. Money in its basic form of bank notes and coins is the most liquid asset and is held as a medium of exchange and store of value. On the contrary, some assets are described as illiquid because they may not be easily traded or their full market value when realized at short notice. Such assets include unsecured loans to bank customers, shares of moribund companies or real estate (CBN, 2011).

The Need for Liquidity

The indicators of poor liquidity management are a fall in asset prices, low marketability of assets, inadequate debt, (Saunders & Cornett, 2005). Moreover, liquidity management is regarded as the life blood of the economy and in its absence financial markets cease to function efficiently profitability (Molefe and Muzindutsi, 2016).

Bank Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses while effective liquidity management tends to ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and another agents' behaviour. Bank liquidity has two distinct but interrelated dimensions: liability (or cash) liquidity, which refers to the ability to obtain funding on the market and asset (or market) liquidity, associated with the possibility of selling the assets. Both concepts are interrelated, and the interaction between them tends towards their mutual reinforcement.

However, under adverse conditions this dependency tends to weaken market liquidity because adverse circumstances that affect one dimension can rapidly be transferred to the other. Under normal circumstances liquidity management is basically a cost-benefit trade off, because a financial institution will be able to obtain funding provided it is willing to pay the prevailing market prices, or has the choice of selling or committing its assets. In like manner a bank can store a stock of liquid assets to ensure some liquidity (liquidity warehousing), although at the expense of smaller returns. However, in the event of a crisis specific to a bank, its access to liquidity may be found to be severely restricted because its counterparties may be unwilling to provide it neither with funds, not even providing collateral nor in exchange for high rates. In a systemic liquidity crisis it may even be impossible for the bank to place its assets on the market. Eventually, poor liquidity management affect earnings and capital. In extreme cases it leads to insolvency and bank failure (Alemayehu & Ndung‟u, 2012). Distressed banks can only access funds from the market at high interest rate (Mpuga, 2002). This eventually causes a decline in the banks' earnings. However, a bank may ration credit if it feels that the liquidity management need of the bank is quite poor. Therefore, poor liquidity management reduces the capacity of the bank to effectively compete (Mathuva, 2010).

To avert distress, it is thus imperative that the managers of businesses and financial institutions should have a well-defined business policy and established procedures for measuring, monitoring, and managing liquidity. Managing liquidity is therefore a core daily process requiring institutions to monitor and project cash flows to ensure that adequate liquidity is always maintained to meet their obligations as they arise. Arising from the above, the study sets out to examine how effective liquidity management has great implications on the financial performance of banks in Nigeria. Alternatively, since deposit mobilization is one of the most important functions of banks. This enables deposits to be mobilized which otherwise would have remained idle and unproductive in the surplus economic unit. Also important is the need for adequate income through interest on loan as this will ensure continued provision of productive resources. Therefore, it is uneconomic and financially unreasonable for banks to allow excess idle cash in the vault or excess liquidity. Rather, they should manage their liquidity to maximize revenues while holding risks of insolvency at a desired level. Tianwei and Paul (2006).

Question: How Do Banks Achieve Liquidity?

Banks dabble in substantial capital market businesses to support repo agreements, prime brokerages, and other financial activities to earn revenues and profit. Hence, they have added complexity in their liquidity requirements. Listed are some of the ways by which banks achieve liquidity:

1. Shorter Asset Maturities: Shorter maturity assets are said to be more liquid. There is also a direct benefit if they shorten it to an extent where the resources mature throughout a cash crunch. This will help banks in meeting their short-term liquidity needs or cash crunches.
2. Improve The Average Liquidity of Assets: Usually, securities tend to be more liquid than loans or other holdings. And short-term maturity assets can be easily liquidated as compared to long-term assets. Thus, securities dispensed in extensive volume and by formidable enterprises, have greater liquidity because they have more creditworthiness than other lesser-known securities.
3. Lengthen Liability Maturities: If the term of liability is longer. Then less it is expected to mature while the bank is still in a cash crunch.
4. Reduce Contingent Commitments: Reduction in the contingent commitments to pay out cash in the future limits the potential outflow. That reconstructs the balance of sources and usage of money. It is for this reason, banks in Nigeria are statutorily required to comply with the Cash Reserve Requirement (CRR) policy of the Central Bank of Nigeria (CBN) as a measure of effectively managing the liquidity positions of banks. As a matter of fact, the first strategy to liquidity management in Nigeria is compliance with the statutory reserve requirement and liquidity ratios as stipulated by the regulatory authority.

To efficiently manage and enhance liquidity management, CBN employs several other strategic measures. According to the Central Bank of Nigeria Annual Report for 2010 (CBN 2010), the monetary easing policy that commenced in late 2009, which was aimed at improving banking system liquidity, ensuring financial system stability and a steady flow of credit to the real sector of the economy continued. To this end, a number of measures were taken by the Monetary Policy Committee (MPC) and these including: the extension of guarantee on inter-bank transactions from March 2010 to December 2010, and further to June 2011 and the reduction of the Standing Deposit Facility (SDF) rate from 2.0 to 1.0 per cent. Other measures include: the approval of a N500.00 billion intervention fund (N200 billion for refinancing and restructuring of DMBs’ facilities to manufacturing enterprises) and the commencement of the operations of the Asset Management Corporation of Nigeria (AMCON). Accordingly, the report states that by December 2010, AMCON to buy off and manage toxic loans in order to strengthen the balance sheets of the banks and facilitate their ability to extend credit to the domestic economy.

From CBN point of view, liquidity management was geared towards improving the liquidity and efficiency of the financial markets without compromising the objective of monetary and price stability. However, be that as it may, Prudent bank management requires that the liquidity position of a bank should be ascertained accurately during operations, in other words, every working day. The liquidity of a firm is measured by liquidity ratios; a class of financial metrics that is used to determine a company’s ability to pay off its short-term debt obligations. From regulatory authority point of view, liquidity ratio refers to the reserve requirement which is a bank regulation that sets the minimum reserve each bank must hold. Commonly used liquidity ratios are the current ratio and the quick (or acid test) ratio.

Vishnani and Bhupesh (2007) affirmed that the most common measure of liquidity is current ratio and return on investment for profitability. The current ratio is used to test a firm’s liquidity, that is, its current or working capital position by deriving the proportion of the firm’s current assets available to cover its current liability. A higher current ratio indicates a larger investment in current assets which means, a low rate of return on investment for the firm, as excess investment in current assets will not yield enough return. A low current ratio means smaller investment in current assets which means a high rate of return on investment for the firm, as no unused investment is tied up in current assets. However, there is consensus in theoretical literatures that the higher the ratio, the better. The concept behind this ratio is to ascertain whether a company’s short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes)., (Loth, 2012).

What is Concept of a Liquidity Management Mechanism?

The Liquidity management mechanism is the mandatory requirement imposed on DMBs by the Central Bank to ensure that DMBs does not become easily insolvent. Thus monitoring DMBs’ liquidity reduces the possibility of raising loans under unfavourable loan agreements, restrictions and at a high interest bearing costs. As Deposit money banks’ liquidity situation is by and large tracked and calculated based on liquidity quotient (Rychtarik, 2009). The Central banks manages the liquidity of DMBs in line with international standards and best practices. using the following liquidity mechanism namely; Vault Cash (VC), Balances Held With CBN, Balances Held With Other Banks in Nigeria, Balances Held With Offices & Branches Outside Nigeria, Money At Call (MAC), Inter-bank Placement (IP), Placement with Discount Houses (PDH), Treasury Bills (TB), Treasury Certificates, Investment in Stabilization Securities, Bills Discounted Payable in Nigeria, Negotiable Certificates of Deposits (NCD), Bankers Acceptances (BA) and Commercial Papers (CP), Investments in FGN Development Stock and Industrial (Other) Investments (II).

2.3 THEORETICAL REVIEW

The term liquidity is a fluid concept and as such Raykov (2017), Abubakar et al. (2018), Lyndon and Paymaster (2016), Syed (2015), and Ejike and Agha (2018) see liquidity as the capacity of an establishment to defray its short-term money-related commitments in a convenient way. According to these authors, high volumes of available cash implies businesses are in a position to honour their financial obligations when they fall due without a default. This position is also held by Mulyana and Zuraida (2018), Mohd and Asif (2018), Abubakar et al. (2018), Onyekwelu et al. (2018), etc. who independently uphold that the types of assets held by corporations and the ease by which those assets could be easily turned into cash indicates how liquid the assets are. For example, stocks and bonds are termed liquid assets because they can be turned into cash within minutes or hours; however, assets like land, buildings, and equipment among others can take days, months, or years before they can be converted into cash.

2.3.1 THEORIES OF LIQUIDITY

The major objective of a commercial bank is to create liquidity while remaining financially sound. However, there are a number of dimensions in the way banks manage their liquidity risk. As there are competing liquidity management theories. These theories basically highlight the relationship between liquidity and profitability as it affects the performance of deposit money banks all over the world. In this research work, a number of theories have been put forward which seek to provide insight into the underlying relationship between liquidity and profitability of deposit money banks. Since Liquidity management theories encompass how liquidity is measured and monitored, and the measures that banks can take to prevent or tackle a liquidity shortage. Theoretically, there are many theories that try to resolve this age long problem, the following theories are relevant for the study:

Liquid Assets Theory This theory states that banks must hold large amounts of liquid assets as reserves against possible demands for payment of depositors. The theory emphasizes the need for holding short-term assets as a prudent cushion in the face of various uncertainties in business operations and the various needs of a firm. According to Nzotta (2004), the level of liquid assets depends on a firm’s perceived need for liquidity, the volatility of its deposits, the state of the financial market and the level and direction of monetary policy of the government. Adequate level of liquidity is positively related with firms’ profitability.

The Shiftability theory of Liquidity: The shiftability theory liquidity replaced the commercial loan theory and was supplemented by the doctrine of anticipated income. The proponents of this theory argued that a bank’s liquidity is adequately maintained if it holds assets that could be shifted or sold to other lenders or investors for cash even during period of crisis or distress. The shiftability theory focuses on the liability side of the balance sheet. The theory contends that supplementary liquidity could be derived from the liabilities of a bank, therefore, shiftability, marketability or transferability of a bank's assets is a basis for ensuring liquidity. The theory further contends that highly marketable security held by a bank is an excellent source of liquidity. This point of view contends that a bank’s liquidity could be enhanced if it always has assets to sell and provided the Central Bank and the discount Market stands ready to purchase the asset offered for discount. Thus this theory recognizes and contends that shiftability, marketability or transferability of a bank's assets is a basis for ensuring liquidity. This theory further contends that highly marketable security held by a bank is an excellent source of liquidity. Dodds (1982) contends that to (a) ensure convertibility (b) without delay and without appreciable loss, such assets must meet these three prerequisites.

In sum, under shiftability the banking system tries to avoid liquidity crises by enabling banks to always sell or repo at good prices (Rasiah, 2010). This theory emphasizes on marketability of bank assets as a better option for investing funds. Also, the theory assumes that repayment from the self-liquidating assets of the bank would be sufficient to provide for liquidity. This ignores the fact that seasonal deposit withdrawals and meeting credit request could affect the liquidity position adversely. Although, the theory fails to reflect in the normal stability of demand deposits in the liquidity consideration. This obvious view may eventually impact on the liquidity position of the bank.

Anticipated Income Theory: This theory holds that a bank’s liquidity can be managed through the proper phasing and structuring of the loan commitments made by a bank to the customers. Here the liquidity can be planned if the scheduled loan payments by a customer are based on the future of the borrower. According to Nzotta (1997) the theory emphasizes the earning potential and the credit worthiness of a borrower as the ultimate guarantee for ensuring adequate liquidity. Nwankwo (1991) posits that the theory points to the movement towards self-liquidating commitments by banks. This theory has encouraged many commercial banks to adopt a ladder effects in investment portfolio.

2.4 EMPIRICAL REVIEW

Empirically, facts from previous research works which investigated the relationship between liquidity management and financial performance of some Deposit money banks in Nigeria as quoted in Nigerian Stock Exchange.

Takon and Mgbado (2020) examines the impact of liquidity on banks’ profitability using liquid assets, bank deposit, treasury bills, and return on asset as proxies. Secondary data was source from the Central Bank of Nigeria statistical bulletin. The study employs Ordinary least square using multiple regression techniques. The study finds that there is a: positive and insignificant impact between bank deposit and return on asset; negative and insignificant impact between liquid asset and return on asset; and positive and insignificant impact between treasury bills and return on asset. The study recommends that appropriate measures should be taken to prevent undesirable market development that may negatively impact on bank deposit; and also the recruitment of competent and qualified personnel to manage and maintain optimal level of liquidity.

Otekunrin, Fagboro & Femi (2019) examines the performance of selected quoted deposit money banks in Nigeria and liquidity management of 17 deposit money banks listed on the Nigerian Stock Exchange (NSE) between 2012 and 2017, the study extracts secondary data thefinancial statements of 15 deposit money banks for six years and analyze the data using ordinary least square method (OLS). Capital ratio (CTR), current ratio (CR) and cash ratio (CSR) were proxies for liquidity management while performance proxies was return on assets (ROA). The study find that liquidity management and bank’s performance are positively related and concludes that liquidity management is an essential factor in business operations and consequently leads to business profitability. It therefore recommends that proper liquidity management would assist in solving the agency theory problem of agency costs that arise when control of companies is separated from the ownership.

Bassey and Ekpo (2018) investigates the critical role played by the CBN and DMBs in fashioning out appropriate framework for liquidity management and identifies the challenges inhibiting effective performance of these roles. The study employs descriptive research design and find that deposit liabilities constitutes a major source of funding liquidity by DMBs while loans and advances constitutes the bulk of the illiquid assets. It also finds that DMBs in Nigeria operates above solvency level, having current ratio greater than unity and are over cautious, investing more in short-term securities to protect their liquidity positions. The study therefore recommends that DMBs should strengthen their credit risk assessment mechanism so as to increase their credit exposure to the private sector and concluded that DMBs should establish a robust liquidity risk management framework that is well integrated into the bank-wide risk management process and ensure that competitive pressures do not compromise the integrity of their liquidity risk management framework, control functions, limit systems and liquidity cushion.

Bassey (2017) investigates liquidity management and performance of Deposit Money Banks (DMBs) in Nigeria from 1986 to 2011. The study adopts descriptive, correlational and inferential statistics and employs multiple linear regression analysis in analyzing the secondary data collected from 24 DMBs and determining their survival, growth, sustainability. The study finds that: there is significant positive relationship between liquidity management and the performance of DMBs in Nigeria; positive correlation between return on equity and liquidity management variables (liquidity and cash reserve ratios) while the relationship between liquidity management and loan to deposit ratio is negative. The key results however indicate that only DMBs with optimum liquidity were able to maximize returns effectively. The study therefore concludes that illiquidity and excess liquidity poses a major problem to the management operations of DMBs and recommends that optimum liquidity model should be adopted by the Board and top management to ensure efficiency and effectiveness in its liquidity management process.

2.5 Liquidity Management and Bank Performance

Kumar (2008) posits that management of liquidity risks is quite fundamental to bank business as every transaction or commitment has implications for its liquidity. Moreover, bearing this in mind the European Central Bank (ECB) (2010) describes bank performance as the capacity of a bank to generate sustainable profits. the European Central Bank has proposed 3 traditional measures of performance using common ratios in assessing a banks (earnings) profitability, these are: (1). Return on Assets (ROA), this ratio measures the efficiency of a firm at generating profits from its assets, (2) ROE, shows how well a company uses investments to generate earnings growth and lastly we have (3) Net interest margins (NIM). Meanwhile, Bikker (2010) identifies costs, efficiency, profits and market structure as the main drivers of bank performance. In the present paper, we shall use all these different ratios as a measure of Nigerian bank’s performance or profitability.

2.5.1 Financial Performance

Bank performance is the term used in relation to its capacity to generate sustainable profitability. For a bank to be successful in its operations, managers must weigh complex trade-offs between growths, return and risk, favouring the adoption of risk-adjusted metrics (Bassey, Tobi, Bassey and Ekwere, 2016). Agbada and Osuji (2013) assert that ensuring profitability is a foremost challenging part of the bank administration because numerous factors are involved in the decision. The profit planning and management is more complex in the highly challenging economic environment. From the extant literature, researchers have applied several surrogates as metric measures of financial performance of banks. Such metrics according to Buba (2010) include a combination of financial ratios analysis, benchmarking and measuring of performance against budget. Others include return on assets, returns on equity, net interest margin, and a host of others. The profitability of banks can be analyzed using many financial ratios, which include return on equity (ROE), return on assets (ROA) and return on investment (ROI). The First and most important profitability ratio is the return on asset (ROA), being a popular metric of financial performance.

ROA = Net income after tax Total assets

1) It is worthy of note that some Scholars have stated that Earnings per share (EPS) serves as a pointer of a bank’s profitability. Other scholars stated that Net profit margin (NPM) and Tobin Q be used as bank’s profitability factor. Note, while Net income gives an idea of how well a bank is doing, but it suffers from one major drawback: It does not adjust for the bank’s size, thereby making it difficult to compare how well one bank is doing relative to another. Ideally, ROE reveals how well a company uses investment funds to generate earnings growth. ROE is calculated thus:

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Interest earning assets include Loans and advances to customers (net), government securities, deposits and placements with banking institutions.

In closing, Banks (2014) argues that to achieve effective liquidity management and profitability, there must be an uninterrupted endeavour of ensuring that a balance exists between liquidity, profitability and risk. This view is supported by Landskroner and Paroush (2011) who argues that in managing assets and liabilities the period of uncertainties in cash flows, cost of funds and return on investments, banks must establish the trade-off between risk, return and liquidity.

3.0 Section Three: METHODOLOGY AND DATA ANALYSIS

3.1 METHODOLOGY

This study adopted the ex-post facto research design as the data utilized there in is historical. From a population stock of 24 banks a sample of five (5) banks were reviewed. These five (5) banks could be regarded as a fairly representative sample of the banking sector based on age, spread, innovation and ranking respectively (CBN, 2016). The banks selected have a wide branch network and timely published financial statement that are readily available in their website and also posted on the internet. The selected banks are: Zenith Bank Plc., United Bank for Africa (UBA) Holding Company Plc, Access Bank Holdings Plc., GTCo.Plc and FirstBank Holding Company Plc. These selected banks in Nigeria have a special status in Nigeria’s Banking industry for they are viewed as strategically important financial institutions [SIFI’s] plus the fact that their group accounts are all run under a holding company.

The study staked all the independent and control variables as used in similar studies presented in Table 1 to ensure that some explanatory variables were not omitted. The study utilized three stage regression analysis as adopted from Ahmed U., Ahmed, Islam, and Ullah, (2015) and this resulted there being six regression from the Model: The basic core regression models for the study are presented in equation 1, 2 and 3: hence, the study adopts with modification, the model of Kargi (2011) which measured profitability using Return on Asset (ROA) as a function of ratio of Non-performing loans to Loans & Advances (NPL/LA) and ratio of Total Loans and Advances to Total deposit (LA/TD) as indicators of credit risk. This study however improved on the model by incorporating two other metrics of measuring deposit money bank performance. They are return on equity (ROE) and net interest margin (NIM).

Herein, we review several parameters with oversight on Liquidity such as (Current ratio – CR) is a measure or available cash or near cash to settle liabilities; we also look at Liquidity ratio (LR), Loan to deposit ratio (LDR), Cash reserve ratio (CRR) and deposit ratio (DR) as proxies for Liquidity Management, while return on assets (ROA), return on equity (ROE) and return on net interest margin (NIM) are the proxies for financial performance (Profitability).These are well displayed in the conceptual framework.

3.1.1 DATA ANALYSIS AND MODEL SPECIFICATION

The study uses time series data. Thus, to determine the nature and extent of the effect of liquidity and profitability, collected data is analysed by employing correlation technique; regressions & descriptive statistics. A well-known statistical package namely Eviews 10 has been used in order to examine the data. This study employs autoregressive lag distributed (ARDL) co-integration technique. This is done in order to determine the dynamic and the simultaneous relationship between liquidity and profitability, given that not all of our time-series may be stationary to the same order (some are I (0) while others are I (1)). The choice of ARDL model is based on several considerations; it had more advantages than other time series econometric applications. First, it does not require all variables to be I (1) as the Johansen framework and it is still applicable if we have I (0) and I (1) variables in our set. As the approach can be implemented regardless of either all variables are integrated I (1), I (0) or both at the same time and can be applied to small finite samples. Second, this technique generally provides unbiased estimates of the long-run model and valid t-statistics even when some of the regressors are endogenous.

Econometric model specification

In order to identify the impact of liquidity management practices on banks performance in Nigeria, the following three regression equations have been used in our model formulation.

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Note(1): It is expected on a priori that, β1-7 will be positively signed.

In sum, we shall be using and dealing with variables proxies for liquidity such as (CR) (LQR) (LDR) (CRR) (DR) and also other variables proxies for performance (ROE, ROA and NIM) of the banks. Choice of these three financial performance indices is because assets, equity and interest rate are very critical to the wholesome evaluation of the financial performance of banks.

Test of Significance and the Decision Rule

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To test the significance of the relationship between the dependent and independent variables, the critical value of F and the test statistic are compared taking cognisance of the degree of freedom k and n-k-1. Thus, if the absolute value of the F statistic is less than the absolute value of the critical value of F, the null hypothesis H0 is accepted otherwise H0 is rejected.

Data analysis, Data validity and Reliability

To ensure validity and reliability of the data collected, only published data in the form of financial statements which is a requirement by law was used. The board of directors of each bank has to attest to the validity and reliability and ensure that the statements show a true and fair view of the bank’s financial position. The data gotten through the secondary source were analysed using correlation coefficient analysis in order to test the hypothesis. There are several types of correlation coefficient formulas. One of the most commonly used formulas in stats is Pearson’s correlation coefficient formula. One of the most commonly used formulas in stats is Pearson’s correlation coefficient formula Moreover, the European Central Bank (ECB, 2010) cautioned that a good performance measurement framework should encompass more aspects of the performance than just profitability as embedded in pure market-oriented indicators and should be less prone to the manipulation from the markets.

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3.2 Research Gap

The footing behind the study is to add in mitigating the knowledge gap recognized in the literature relating to liquidity management practices and banks profitability in Nigeria. Yet these research studies are not adequate given their lack of consensus. Literature reviewed locally clearly divulges that there is deficiency of evidence on liquidity management practices and their effect on banks profitability in Nigeria. Thus, from the empirical results, it can therefore be deduced that previous studies on bank’s liquidity and performance still leave huge gaps since these studies have not reached a compromised conclusion on the subject matter, thereby prompting extra work to exploit the gap.

3.0 SECTION FOUR: PRESENTATION OF DATA AND ANALYSIS

This section places emphasis on the need to estimate, analyse and interpret models already formulated. In addition, the hypothesis will be tested. Only secondary sources of data are employed.

4.1 RESULTS AND FINDINGS

This section focuses on the results of the study as pictured in the appendix.

Table 1 captures all figures and processes it using Microsoft Excel in Ratio Format

Table 2 shows the descriptive statistics of the data generate from all banks

Table 3.1A [1-5] comprises of first regression equation for ROA

Table 3.2B [1-5] contain the results of second regression equation for ROE

Table 3.3C [1-5] contain the results of third regression equation and for NIM Finally, table 3.4 explains summary of hypotheses testing.

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Policy Implication to Research and Practice

The study investigated the effects of liquidity management on financial performance of deposit money banks in Nigeria for the period 2005-2021. The study anchored on shiftability theory that boarder on banks financial performance and liquidity management. The data used for the study was from secondary sourced and was sourced from the Central Banks of Nigeria and from the Annual Financial reports of banks in Nigeria. The study made use of Panel regression analysis given that the date set for the study is both Cross-sectional and Time-series in nature.

Upon critically reviewing the performances of all five strategically important DMB’s using all performance indicators ROA, ROE and NIM mentioned. It was discovered that no bank is the same as most show a strong model relationship with high liquidity ratios producing adequate profits while some others barely show any relationship to establish whether the model used in the regression analysis has a sound goodness of fit. Because some beta coeficients were positive and impactful while others were negative and some were just insignificant yet all are impacting on ROA, ROE and NIM (Profitability performance Indicators) of deposit money banks in Nigeria.

In sum, the result of the Panel regression indicates that only DMBs with optimum liquidity were able to maximize returns effectively, for all the banks tested, liquidity ratio and deposit rates averagely have positive and significant effects on the financial performance of the banks as measured by return on assets, return on equity and net interest margin. On the other hand, the result reveals that loan to deposit ratio and cash reserve ratio have negative but significant effect on the financial performance of the banks as measured by return on assets, return on equity and net interest margin.

In real life, we see that the banks are struggling with the Pen-rossian growth paradox with respect to their dividend pay-out policy; the asset shiftability theory to be able to take strategic positions in the short and longrun futures and options opportunities both in multi-currency dimensions coupled with other regulatory hiccups/shocks as per interest rate changes and exchange rate flunctuations etc. plus the ever improving and expanding loan pool bracket not forgetting other national and international threats cum opportunities such as revised regularory frameworks. In all, the study rejected all the three null hypotheses in favour of the alternative hypotheses with the conclusion that, liquidity management has significant effect on return assets (ROA) of banks in Nigeria, on return to assets (ROE) and on net interest margin (NIM) in Nigeria respectively.

RECOMMENDATIONS OF FINDINGS

Based on the findings, the following recommendations are proposed:

To ensure continuous survival and success, the study recommends for the deployment of effective internal control systems that could strengthen the liquidity fundamentals of the firms. More specifically, tighter systems or controls on cash management should be rooted for. The study therefore recommends that banks in Nigeria should establish a sound governance and risk management system such as Asset Liability Management Committees (ALCO) for liquidity management , develop strategies and policies for the management of liquidity that is well integrated in the banks risk management practices , establish Contingency Funding Plan that clearly articulate the steps to be taken to address liquidity shortfall during periods of stress or emergency, carryout active the monitoring of the liquidity funding needs of banks to avert any potential liquidity challenge that could trigger crisis is promptly addressed. By so doing, personnel in charge of finances in the firms would gain in-depth knowledge on the determination of liquidity levels that would not be of disadvantage to the firms. In order for the firms to increase their profitability, there is also the need for them to increase their size in the aspects of customer base, net assets, sales volume, and market share. The firms increasing their size will not only boost them in terms of profitability, but will aid them to gain competitive advantage over others. The firms will further gain economy of scale when they increase their sizes. Economies of scale gained from increased firm size performs a vital function in predicting firms’ viability. Therefore, the firms should not only target local markets but should tactically increase their activities to other terrestrial markets in the globe. Thus, the firms establishing various branches at different locations is tactically paramount if they are to maximize returns on their investments. As large banks can benefit from economies of scale thus enabling cost reduction (Molyneux , Thornton (1992), Bikker, Hu(2002), Goddard and al (2004)). Larger banks might also benefit from economies of scope economies (reduced risks and product diversification), by accessing to markets in which small banks cannot enter (Menicucci , Paolucci (2016). It also recommended that the regulatory body should ensure further capitalisation of DMB’s to guarantee system stability while the bank managers should adhere to reserve requirements from the Central Bank so as to absorb financial shocks and operate profitably. Because a high volume of equity will reduce the cost of capital, causing a positive effect on profitability. Furthermore, it is estimated that banks with higher capital ratio are less dependent on external funding, with a positive impact on bank profit. Therefore, well capitalized banks achieve greater profitability because lower risk raises bank’s worthiness and reduces the cost of funding (Menicucci and Paolucci 2016). This view is in tandem with Garcia Herrero and al (2009) who asserts that the degree of capitalization could affect the profitability of bank through 4 main channels. Firstly, high levels of capital may raise profitability through an increase in the share of loans. Secondly, high capitalization positively influences credit worthiness. Thirdly, a well-capitalized bank will reduce their cost of funding through a reduction in borrowing. In addition, deposit money banks should schedule the maturity periods of their secondary reserve assets to correspond to the period in which the funds will be needed. In closing, to ensure that our deposit money don’t go off track the study recommends the Central Bank should encourage banks by maintaining a flexible Minimum Monetary Policy [MPR] or discount rate so as to enable the deposit money banks take advantage of the alternative measures of meeting the unexpected withdrawal demands, and reduce the tendency of maintaining excess idle cash at expense of initiatives to boost profitability.

As an addendum, in the spirit of objectivity and fairness the researcher believes regulators must be carried along and must also play an active role to help the financial system in its fight against the ills of excess and poor liquidity

REGULATORY PROGNOSIS TO AID LIQUIDITY MANAGEMENT IN BANKS

Based on the foregoing analysis and findings, the following recommendations are also advised and made as the way forward for the effective management of liquidity by the CBN for Nigerian banks.

1. Reduce Volatility in the Money Market

Despite the concerted effort of the CBN, volatility in the quantity and prices of assets remains a regular feature of the Nigerian money market. To address this problem, the major source of this instability should be identified and controlled. The major sources of this instability include monetization of crude oil receipts, CBN large sales of foreign exchange, and frequent changes in CRR as well as high risk premium on interbank rates and conflict in the monetary policy stance of Government. To redress these problems, the CBN should use its full array of instruments to ensure adequate supply of liquidity to meet banks demand for reserves. There should be clearly articulated monetary framework so that market participants can understand applicable operating target of monetary policy.

2. Regulator Reduced Frequent Changes in CRR

Since changes in CRR entails some costs on the part of the banks, using it as instrument of monetary policy should be infrequent and only used when there is a strong reason for not using market based instruments. Study by IMF (2013) has also confirmed that changes in CRR widen the spread between lending and deposit rates.

3. Adopt Sound Principles of Liquidity Risk Management by Banks

The following selected principles for sound liquidity risk management by banks, enunciated by Basel Committee on Bank Supervision (208) are quite instructive and are adopted in this study.

i. DMBs should establish a robust liquidity risk management framework that ensures they maintain sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress event, including those involving the loss or impairment of both secured and unsecured funding sources.
ii. DMBs should clearly articulate a liquidity risk tolerance that is appropriate for their businesses and role in the financial system.
iii. DMBs should have sound processes for identifying, measuring, monitoring and controlling liquidity risk. These processes should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over appropriate set of time horizons.
iv. DMBs should actively monitor and control liquidity risk exposures and funding needs within and across legal entities, business lines and currencies, taking into consideration legal, regulatory and operational limitations to the transferability of liquidity.
v. DMBs should establish a funding strategy that provides effective diversification in the sources and tenor of funding. They should maintain an ongoing presence in their chosen funding markets and strong relationships with fund providers.
vi. DMBs should actively manage their collateral positions, differentiating between encumbered and unencumbered assets. They should monitor the legal entity and physical location where collaterals are held and how it will be mobilized in a timely manner.
vii. DMBs should publicly disclose information on a regular basis that enables market participants to make an informed judgment about the soundness of their liquidity risk management framework and liquidity position.

4. Reduce Multiple Objectives of Liquidity Management

As a positive step towards addressing this problem, the CBN should set monetary and price stability as its overriding objective for liquidity management. Other objectives of monetary policy such as maintenance of external reserves, promotion of sound financial system and balance of payments viability should be secondary and subsumed in the price stability. This is based on the logical reasoning that the Central Bank should do what it knows best to do- maintaining price stability. To achieve this objective the CBN should work towards adoption of price level as the nominal anchor for monetary policy through a policy of inflation targeting.

5. Reduce Money Market Segmentation

To reduce segmentation in the money market, the CBN needs to address the gaps in bank supervision framework and take measures to enhance credibility of its assessment of banks health. Insistence on disclosure by banks of their true net worth and asset qualities through adherence to prudential guidelines will help to ward off possible threats of liquidity crises.

6. Address the Problem of Excess Liquidity

The use of large foreign exchange sales to mop up excess liquidity even though it has a salutary effect of strengthening the Naira, may fail to deal with problem of excess liquidity. This is because while the announced policy measures of the government have maintenance period of two weeks, major sources of systemic liquidity shocks such as oil receipts and disbursement come on monthly basis. There is therefore the need to align systemic liquidity with the announced policy stance through the adoption of medium term forecast of banking system liquidity. Also banks should strengthen their credit risk assessment mechanism so as to increase their credit exposure to the private sector.

7. R egulatory authority should also put in place appropriate policy with compliance measures to check high volume cash transaction and cash hoarding prevalent in the economy. This is important because liquidity management is cumbersome and may be ineffective in an economy that operate solely on large volume of cash transaction or conducts a large proportion of its transactions in cash.

9. Likewise, the Central Bank of Nigeria must critically review and follow-up or monitor the effectiveness of liquidity policy tools in banks and where necessary, appropriate sanctions placed on erring banks. This may be so in order to ensure effective implementation of these policy tools in an attempt to achieve desired liquidity level. While it may be true that CBN is effectively enacting and reviewing liquidity management tools such as the Open Market Operation, Cash Reserve Requirement, Liquidity ratios, Monetary Policy Rate among as often been stated in their Annual and Economic reports, compliance by the beneficiary banks is not guaranteed as bank returns to the regulatory authority has been reportedly falsified over times.

Future Research

This study recommends that, further researches on this topic should make use of a sample size of more than five banks and should use a time period of more than fifteen years. This if properly done, may provide more robust findings for the purpose of policy implementation.

4.2 CONCLUSION

Arising from the findings, it is evident that an effective liquidity management has a positive impact on all the proxies of bank performance (returns on assets, returns on equity and net interest margin). This finding supports the findings of Olagunju, David and Samuel (2012); and Bassey (2017) in Nigeria. The study concludes that the financial performance of the banks in Nigeria can be improved upon by the establishment of sound and robust liquidity management structure in place to ensure that adequate liquidity is maintained to meet matured and maturing obligations as they fall due.

Astute bank management entails delicate balancing of the liquidity and profitability trade-off. Because excessive liquidity reduces profitability while excessive profitability risks exposure, as any unguided pursuit of maximum profitability could lead to the insolvency of a bank. This study was carried out to empirically examine the nexus between liquidity and profitability of five strategically important banks in Nigeria with fifteen years financial statement of each of the banks, the concept of liquidity and profitability, assessment of banks profitability, liquidity management and anticipated income theory, were explored. Since bank’s optimal liquidity level is likely to vary over the business cycle, typically rising when there are higher expected costs of distress, the relationship between liquidity and profitability is likely to be highly cyclical, becoming more positive during the periods of distress as banks that increase their liquidity improve on their profitability (Osborne et al., 2012). Thus, there may be a positive or negative relationship between liquidity and profitability in the short-run depending on whether a bank is above or below its optimal liquidity level. The study concluded that the Central Bank of Nigeria should critically review and monitor the effectiveness of the implementation of its liquidity policy tools in banks via a two way prognosis of regulators and banks alike to achieve the desired liquidity level and where necessary impose appropriate sanctions on erring banks

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Frequently Asked Questions: Language Preview - Bank Liquidity & Financial Performance

What is the main topic of this language preview?

This preview focuses on the relationship between bank liquidity management and the financial performance of deposit money banks, particularly in Nigeria.

What does the table of contents include?

The table of contents covers an introduction to the study, a literature review on bank liquidity, the methodology and data analysis used, and the presentation of data, analysis, and conclusions. It also includes a list of references.

What is the abstract about?

The abstract discusses the importance of liquidity and profitability for financial institutions, defining liquidity as a bank's ability to meet its obligations. It highlights the need for prudent liquidity management and the aim of the study to find empirical evidence of the impact of effective liquidity management on the financial performance of deposit money banks in Nigeria between 2005-2021.

What is covered in the introduction (Chapter One)?

The introduction provides background on the importance of liquidity in working capital management, defines bank liquidity, and discusses the challenges banks face in maintaining both liquidity and profitability. It includes the research questions, objectives, hypotheses, and significance of the study.

What are the key research questions?

The key research questions examine the effect of bank liquidity management on profitability, the relationship between lending levels and profitability, the influence of cash equivalents on bank performance, and the challenges in resolving the profit and liquidity dilemma of banks.

What are the objectives of the study?

The main objective is to investigate the effect of liquidity management on bank profitability and performance in Nigeria, measuring the impact of various ratios like cash to total assets, cash to deposit, loan to deposits, etc., on ROA, ROE, and NIM.

What hypotheses are being tested?

The main hypothesis is whether there is a significant relationship between effective liquidity management and the performance of deposit money banks in Nigeria. Several sub-hypotheses test the relationship between profitability and specific ratios such as current ratio, deposit to asset ratio, and liquidity ratio.

What does the literature review (Section 2) discuss?

The literature review explores the concept of bank liquidity, conceptual and theoretical reviews including theories of liquidity, and empirical reviews on liquidity management and bank performance. It also addresses financial performance metrics.

What theories of liquidity are mentioned?

The preview mentions the Liquid Assets Theory, Shiftability Theory of Liquidity, and Anticipated Income Theory.

What is the methodology (Section 3) used for the study?

The study adopts an ex-post facto research design using historical data from a sample of five Nigerian banks. It employs correlation techniques, regressions, descriptive statistics, and autoregressive lag distributed (ARDL) co-integration to analyze the data.

What is the model specification used?

The model uses three regression equations to assess the impact of liquidity management practices on bank performance. The equations use ROA, ROE, and NIM as dependent variables and various liquidity ratios as independent variables.

What are the results and findings (Section 4)?

This section will likely present the results of the data analysis, including regression results, and testing of the hypotheses.

What are some policy implications mentioned?

The study highlights policy implications related to the importance of liquidity management framework and the need for banks to employ sound governance and risk management systems. The regulators must be carried along and must also play an active role to help the financial system in its fight against the ills of excess and poor liquidity

What are the recommendations of findings?

To ensure continuous survival and success, the study recommends for the deployment of effective internal control systems that could strengthen the liquidity fundamentals of the firms and tactically increase their activities to other terrestrial markets in the globe. As the banks will have established various branches at different locations and maximize returns on their investments, there must be an uninterrupted endeavour of ensuring that a balance exists between liquidity, profitability and risk. This view is supported by Landskroner and Paroush (2011) who argues that in managing assets and liabilities the period of uncertainties in cash flows, cost of funds and return on investments, banks must establish the trade-off between risk, return and liquidity. The regulator reduced Frequent Changes in CRR, to do this the CBN should work towards adoption of price level as the nominal anchor for monetary policy through a policy of inflation targeting. 5. Reduce Money Market Segmentation.

Where can I find the original study this preview is based on?

The language preview includes a comprehensive list of references, which can be used to locate the full original studies cited.

• Hochschule: University of Benin
• Autor: Victor Mahonwu (Autor:in)
• Seiten: 55
• Katalognummer: V1313253
• ISBN (PDF): 9783346794567
• ISBN (Buch): 9783346794574
• Sprache: Deutsch
• Schlagworte: liquidity, profitability, nigeria